5 Legal Points to Consider When Buying a Commercial Property for Investment

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One of the key elements of any property transaction, which are often ignored until too late, are the legals. We spoke to Pragnesh Modhwadia, Managing Partner, and Jaymini Ghelani, Consultant Solicitor, at Axiom Stone Solicitors in London, who advised us of the main legal points to consider when buying your commercial property:

 

1. Tenure (Freehold or Leasehold)

Is it freehold or is it leasehold? This is usually one of the first questions asked by your Lawyer when instructed. Both types of transactions come with various risks and rewards. Proper due diligence on leasehold properties is a must - this will reveal potential issues such as any restrictions on use and obligations to the landlord such as financial contributions toward the upkeep of the property, and whether consent would be required for alterations. Those that are investing in mixed-use properties must be mindful that where the residential element makes up more than 50% of the property’s internal floor area, that the correct notices have been served by offering the tenants the right to purchase the freehold before it is placed on the open market. If the notices are absent or incorrect then the tenants can serve a notice on the new owner and can force the new owner to sell!

2. Tenants

Whether it be retail, offices or industrial, tenants are a huge factor to take into consideration when purchasing a commercial property. According to Jaymini and Pragnesh “lenders are happier to lend against properties that are well tenanted, so it is beneficial at times to have a tenant in situ - and that being a good tenant too’. Blue-chip tenants as compliance with their FR&I (Fully Repairing & Insuring) lease obligations is typically higher when compared to independent tenants. It is important to familiarise yourself with the legal matters concerning your tenant, such as their rights under and leases or licences and it is important to familiarise yourself with the Landlord and Tenant Act 1954 which your Lawyer can explain to you in detail. You should also familiarise yourself with the rent review provisions, Tenant and Landlord repairing obligations, rent payment dates and break clauses (if applicable) to your purchase. The importance of instructing a good lawyer also means that they have the capability of reviewing any existing leases that are applicable to your transaction. It is important to be aware of any onerous clauses in the document which your Lawyer can point out to you.

3. Tax: VAT and SDLT

As Lawyers, we usually do not give tax advice so it is important that you do also find yourself a decent accountant who is knowledgeable in property taxes. If your property has been elected for VAT, then the seller will charge VAT on the purchase price. Provided that you are registered for VAT then you will be able to recover the VAT charged to you on the purchase price and on any costs related to the property purchase. However, this has major cash flow implications. Transfers of going concern (TOGC) are usually an attractive option for buyers as there is no VAT payable on the purchase price if the transaction complies with the TOGC requirements. In order for a transaction to qualify as a TOGC, the buyer must be registered for VAT, have submitted a notification of its option to tax to HMRC and the property must be capable of being run as a property rental business (ie sold with tenants in place) and the Buyer should intend on carrying out the same type of business. Bear in mind that if you are buying a property that is being traded or 'flipped’, TOGC cannot be used - and a good lawyer will spot that quickly.

Purchasers should also be aware that where VAT is paid on the purchase price the Stamp Duty Land Tax (SDLT) payable will be calculated on the total consideration paid, i.e. the purchase price plus the VAT. Unfortunately, that additional SDLT is non-recoverable. Another key example is the SDLT paid on commercial mixed-use properties which at times can be cheaper in taxes if you qualify for multiple dwelling relief. Your legal advisor will be able to explain this to you in detail should you qualify.

4. Costs

When it comes to buying a commercial property, Pragnesh advises ‘that it is best to always get a free estimate from your Lawyer. At Axiom Stone, we like to be clear from the onset of the extra costs you may incur. Our fee estimates are prepared on the information given to you, so will include a breakdown of our legal fees, the Land Registry fee, an estimate on your searches, a stamp duty calculation plus any other costs we anticipate you will have to pay. Individuals need to be prepared when it comes to investing in property, that there may be extra costs involved so it is crucial to ensure that you can afford to cover these costs too.

5. Deal structure

It is also important to be wary of the structure of your deal. If you are buying your property via an auction, then it is imperative that you ask your Lawyer to review the auction pack and prepare a report on title. The report will go through the auction pack in depth and highlight salient matters you need to be aware of. Regardless of whether you are buying through an auction or via a private sale, it is still imperative to be aware of all the issues concerning your property and due diligence checks are critical prior to committing to exchange. Some of the best value deals are traded or 'flipped' deals or forward-funding deals where the property is not yet built but has an agreement to lease in place - these transactions are legally more complicated but not insurmountable and an experienced lawyer is a must.

 

Choosing the right Lawyer can be a daunting process, so it is important to choose one that you are comfortable with, one that is open-minded and one that has the expertise in commercial property so that they can advise you on what to be wary about and what to take a view on. No property is perfect, but more often than not they do stand the test of time.

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